Don't go back

The committee under Parthasarathi Shome, which was appointed by the prime minister  in July to look into the complaints about the General Anti-Avoidance Rules (GAAR), has not served the best interests of the country’s tax administration by recommending postponement of their implementation by three years. The delay will practically mean an indefinite freeze.

The committee’s excuse is that the tax officials will need time to earn proficiency in tax matters, especially in international taxation issues. This is an unacceptable argument. Tax laws keep changing and after three years the officials might need more time. To claim that the country’s officials do not understand international tax laws well enough to implement a well-intentioned system of rules is ludicrous.

The committee has also recommended that GAAR should be invoked, whenever the rules come into effect, only in the case of transactions done with the sole intention of tax benefit.  This will be difficult to assess in most cases because a business transaction usually has many dimensions. The effort to prove that it was done only to  avoid taxes will mostly lead to litigation, and the purpose of the provision will be lost.

The rules were also originally intended to stop the flow of tainted money into the country through companies registered in tax havens like Mauritius. This purpose also will be defeated because the committee has suggested that GAAR should not be used to examine the genuineness of the residency of an entity set up in Mauritius. This means no questions will be asked about the colour of money that comes in from questionable sources, and  money-laundering and tax evasion will continue. 

The rules deserved to be reviewed because they put too much discretion into the hands of officials. Some loopholes had to be plugged and the scope for harassment of genuine investors had to be removed.

But the basic principle behind the rules was sound as they sought to introduce the best international standards. Most other countries, both developed and developing, have similar rules in their tax systems. But a section of the financial community, which has a vested interest in continuing the present system, had opposed them. The government should not succumb to their pressure in the name of increasing investment flows into the country.